SLA in supply chain management: What are service level agreements?

In supply chain management, SLAs are crucial documents that outline how a provider and a client will work together. These strategic tools incorporate several indicators that establish expectations, define timelines, reduce risks, and highlight areas for improvement.

In this post, we explain what an SLA is and how it differs from a service level. We also provide examples of SLAs in the supply chain and examine how to adhere to these agreements.

What is an SLA?

An SLA (service level agreement) is a formal contract signed between a service provider and a client. It sets out each party’s responsibilities and, in B2B2C contexts, the objectives to meet to keep end-customers satisfied.

SLAs can be highly detailed, containing key metrics such as required response times, service availability, delivery windows, acceptable error thresholds, and support protocols. The goal is to ensure smooth supply chain operations and give companies a clear framework for evaluating service quality. SLAs may evolve by mutual consent. In addition to facilitating communication between service providers and clients, they serve as a valuable mechanism for conflict prevention.

Difference between SLA and service level

Although the terms SLA and service level are often confused, they refer to two different concepts:

• An SLA is the contractual document signed between a service provider and a client. It specifies the service, each party’s duties, the duration, and any penalties for noncompliance.
• Service level is a measurable indicator that forms part of an SLA. It captures expected performance and shows whether the agreement is being met. It can be calculated using data such as the number of items sold or services delivered.

In short, the SLA lays down the rules, while service levels track results.

Differences between SLA, SLO, and SLI

An SLA is the contract between a provider and a client that outlines service commitments and expectations, including performance, quality, and timeline metrics. These agreements typically set numerical targets for specific periods, which in turn make it possible to measure concrete aspects such as response times or error rates. To achieve this, two related metrics appear in most SLAs:

• Service level agreement (SLA): The contract that identifies the required activity, response expectations, and the responsibilities of each party.
• Service level objective (SLO): A numerical goal to meet in a specific timeframe, for example, “completing a shipment within two hours at least 95% of the time.” SLOs are included in SLAs.
• Service level indicator (SLI): The real service-level performance data that prove whether the SLOs were achieved (e.g., actual cycle time).

Types of SLAs in the supply chain

Supply chain operations use several SLA structures, depending on scope and client needs:

• Customer-based SLA: A single agreement covering every service provided to one client and detailing the duties of both parties.
• Service-based SLA: One contract for a standardized service delivered to multiple clients.
• Multilevel SLA: A tiered model that supports varied pricing and different performance packages.

Examples of SLAs in the supply chain

SLAs can apply to many areas of a supply chain. Here are some practical examples:

• Inventory management SLA. A provider may be required to maintain more than 95% availability for certain SKUs, helping the client avoid lost sales due to stockouts.
• Procurement SLAs. SLAs can also define lead times for buying goods and services. For instance, they might require that 90% of new suppliers receive purchase orders within 10 business days.
• Dispatch SLAs. A contract might state that 99.5% of outbound orders must be error-free, reducing reverse logistics costs and increasing customer satisfaction.
• Delivery SLAs. These agreements focus on last-mile delivery performance. One clause might require 99% of shipments to reach their destination within 3–5 business days.

How to meet SLA commitments

Once the agreement is signed, the service provider must keep operations aligned with the terms of the SLA. Several tools and strategies can support logistics teams in simplifying resource administration and maintaining strong performance:

• Deploying a warehouse management system (WMS) helps improve service levels, minimize errors, and boost productivity. Interlake Mecalux’s Easy WMS, for instance, controls and optimizes all intralogistics processes, providing comprehensive, real-time inventory traceability.
• For supply chains with multiple warehouses and stores, distributed order management (DOM) software can administer resources in a unified way to foster SLA compliance. Interlake Mecalux’s Easy DOM applies client-specific business rules to orchestrate fulfillment optimally, assigning each outbound order to the ideal supply node. It aligns with business model priorities to minimize delivery times and maximize cost-effectiveness.
• Another way to meet SLA commitments is to invest in cutting-edge intralogistics technology. Automated storage and retrieval systems (AS/RS) raise throughput by increasing operational cycles in the warehouse. Reconfiguring a facility’s layout can also enhance efficiency.

In addition to obligations, SLA contracts often include consequences for non-compliance. The American Productivity & Quality Center recommends balancing incentives with repercussions.

SLAs: The roadmap for reliable partnerships

SLAs are vital documents for guiding business relationships. By establishing expectations, responsibilities, and metrics to be monitored, they serve as a roadmap for achieving positive outcomes. In addition to ensuring reliable service quality and delivery, SLAs foster transparency and trust across the supply chain.